Research into water allocation through effective water trading - final report

112 Pages·2012·4.12 MB·English

by  Darren Lumbroso

Dr John Raffensperger

Dr Julien Harou
University College London
Phase 2 final report
Research into water allocation
through effective water trading
MAM4964-RT004-R02-00 December 2012
Phase 2 final report
Research into water allocation
through effective water trading
Cover photograph: River Great Ouse in East Anglia
MAM4964-RT004-R02-00 December 2012
Phase 2 final report
Research into water allocation through effective water trading
Document information
Document permissions Confidential - client
Project number MAR4964
Project name Research into water allocation through effective water trading
Report title Phase 2 final report
Report number RT004
Release number R02-00
Report date 4 December 2012
Client Anglian Water
Client representative Alison Thompson
Project manager Darren Lumbroso
Project director Steven Wade

Document history
Date Release Prepared Approved Authorised Notes
04 Dec 2012 02-00 DML SDW SDW Final version revised following comments from
the Working Group
02 Nov 2012 00-01 DML SDW SDW

Document authorisation
Prepared Approved Authorised

© HR Wallingford Ltd
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MAR4964-RT004-R02-00
Phase 2 final report
Research into water allocation through effective water trading

MAR4964-RT004-R02-00
Phase 2 final report
Research into water allocation through effective water trading
Contents
Foreword _______________________________________________________________ 1
Executive summary ______________________________________________________ 2
Glossary of terms ________________________________________________________ 5
1. Introduction _________________________________________________________ 8
1.1. Background to the research .............................................................................................................. 8
1.2. Objectives and assumptions ............................................................................................................. 8
1.2.1. Objectives ............................................................................................................................ 8
1.2.2. Assumptions ........................................................................................................................ 8
1.3. Scope of the report ............................................................................................................................ 9
1.4. Drivers for the research ..................................................................................................................... 9
1.5. Research team ................................................................................................................................ 11
1.6. Current relevant research projects .................................................................................................. 12
2. Water abstraction licensing and trading in England and Wales _________________ 13
2.1. The water abstraction licensing regime in England and Wales ...................................................... 13
2.1.1. Equitability .......................................................................................................................... 14
2.1.2. Efficiency ............................................................................................................................ 14
2.1.3. Flexibility ............................................................................................................................ 15
2.1.4. User needs and environmental requirements .................................................................... 15
2.2. Current water trading system in England and Wales ...................................................................... 15
3. Methodology and approach ____________________________________________ 18
3.1. Approach ......................................................................................................................................... 18
3.2. Case study area .............................................................................................................................. 19
3.3. Details of the trading systems researched ...................................................................................... 21
3.3.1. Improved pair-wise trading ................................................................................................ 21
3.3.2. Common pool method........................................................................................................ 22
3.4. Summary of Phase 1 - Engagement with stakeholders .................................................................. 23
3.4.1. Introduction ........................................................................................................................ 23
3.4.2. Method ............................................................................................................................... 24
3.4.3. Findings and discussion..................................................................................................... 25
3.4.4. General perceptions of water trading ................................................................................. 28
3.5. Phase 2: Introduction ...................................................................................................................... 31
3.6. Development of trading models for the Upper Ouse and Bedford Ouse CAMS area .................... 32
3.6.1. Introduction ........................................................................................................................ 32
3.6.2. Improved pair-wise trading ................................................................................................ 33
3.6.3. Modelling improved pair-wise trading ................................................................................ 35
3.6.4. Common pool method........................................................................................................ 39
3.6.5. Workshops ......................................................................................................................... 44
4. Findings from workshops ______________________________________________ 45
4.1. Introduction ...................................................................................................................................... 45

MAR4964-RT004-R02-00
Phase 2 final report
Research into water allocation through effective water trading
4.2. Knowledge and experience of trading ............................................................................................. 45
4.3. Reactions to the common pool approach ....................................................................................... 46
4.3.1. Fairness ............................................................................................................................. 46
4.3.2. Flexibility ............................................................................................................................ 47
4.3.3. Efficiency of the bidding page ............................................................................................ 47
4.3.4. Efficiency of water use in the catchment ........................................................................... 48
4.3.5. Engagement with the approach ......................................................................................... 48
4.3.6. Conditions for engaging with the common pool approach ................................................. 48
4.3.7. Overall benefits and limitations of the common pool system ............................................ 49
4.4. Reactions to the improved pair-wise trading approach ................................................................... 50
4.4.1. Fairness ............................................................................................................................. 50
4.4.2. Flexibility ............................................................................................................................ 50
4.4.3. Efficiency ............................................................................................................................ 51
4.4.4. Improving business ............................................................................................................ 51
4.4.5. Engagement with the approach ......................................................................................... 51
4.4.6. Conditions for engaging with improved pair-wise approach .............................................. 52
4.4.7. Overall benefits and limitations of the pair-wise approach ................................................ 52
5. Discussion _________________________________________________________ 52
5.1. Current system ................................................................................................................................ 52
5.2. Lessons from Australia .................................................................................................................... 53
5.3. Research assumptions and related findings ................................................................................... 55
5.3.1. Number and diversity of abstractors .................................................................................. 55
5.3.2. Usefulness of short-term and long-term trades ................................................................. 55
5.3.3. Availability of trusted information ....................................................................................... 56
5.3.4. Use of existing hydrological models .................................................................................. 56
5.3.5. Applicability of the method and the effect on capital costs ................................................ 56
5.3.6. The relationship between trading potential and agricultural; demand ............................... 57
5.3.7. The viability of downstream versus upstream trades ........................................................ 57
5.3.8. Uncertainty amongst abstractors regarding the value of water ......................................... 57
5.4. How stakeholders’ concerns could be addressed ........................................................................... 57
5.4.1. Ring-fencing and equity concerns ..................................................................................... 57
5.4.2. Making water a commodity, ignores rights to access ........................................................ 58
5.4.3. Adequate hydrological modelling ....................................................................................... 59
5.5. Requirements for effective water trading ........................................................................................ 59
6. Summary of the findings ______________________________________________ 60
6.1. Stakeholders’ views ........................................................................................................................ 60
6.2. Technical findings............................................................................................................................ 61
7. Recommendations ___________________________________________________ 61
7.1. Trading platforms and water management ..................................................................................... 61
7.2. Social science ................................................................................................................................. 62
7.3. Institution building............................................................................................................................ 63
8. References ________________________________________________________ 63

MAR4964-RT004-R02-00
Phase 2 final report
Research into water allocation through effective water trading
Appendices _____________________________________________________________ 1

A. Improved pair-wise trading - Illustrative results for three policy scenarios
B. Optimisation based formulation for pair-wise trading for the Upper Ouse and
Bedford Ouse CAMS area
C. Water demand estimation curves
D. Technical approach in setting up the common pool model and trading
demonstration
E. Abstractor telephone questionnaire
F. Questionnaires used in the October 2012 workshops

Figures
Figure 1.1: Methods for dealing with future water scarcity ....................................................................... 10
Figure 3.1: Approach to the research ....................................................................................................... 19
Figure 3.2: Location of the surface water abstraction licences in the Bedford Ouse and Upper Ouse
CAMS area ................................................................................................................................................ 21
Figure 3.3: Pair-wise trading ..................................................................................................................... 22
Figure 3.4: Common pool method ............................................................................................................ 23
Figure 3.5: Number of stakeholders from different sectors contacted in Phase 1 .................................... 24
Figure 3.6: Influences on water management .......................................................................................... 26
Figure 3.7: Example of an Australian water trading web site ................................................................... 34
Figure 3.8: Example of a schematic diagram of an improved pair-wise trading scheme that could be
used to facilitate trading via a web site ..................................................................................................... 35
Figure 3.9: Bedford Ouse and Upper Ouse CAMS area showing the active surface water licences ....... 38
Figure 3.10: User’s log in page for the common pool trading system ..................................................... 42
Figure 3.11: Part of the user’s bidding page ............................................................................................. 42
Figure 3.12: Part of the auction’s manager’s page ................................................................................... 43
Figure 5.1: Illustration of how reducing flows increase trading opportunities and the value of stored
water 53
Figure 5.2: Comparison of water use between Australia and England and Wales .................................. 54

Tables
Table 2.1: Permanent versus temporary trades during the 2003 to 2008 period ..................................... 16
Table 2.2: Trades by sectors during the 2003 to 2008 period .................................................................. 16
Table 2.3: Current possible trading scenarios .......................................................................................... 17
Table 3.1: Details of the abstraction licences in the Upper Ouse and Bedford Ouse CAMS by sector
in 2009 ...................................................................................................................................................... 20
Table 3.2: Overview of interview schedule high-level topics .................................................................... 25
Table 3.3: Factors likely to affect willingness of abstractors to trade water ............................................. 31
Table 3.4: Example of a possible hierarchy of pre-approved trades ........................................................ 34
Table 3.5: Environment Agency CAMS consumption factors ................................................................... 37
Table 3.6: Volumetric charges between sectors assumed in the improved pair-wise trading
modelling ................................................................................................................................................... 37

MAR4964-RT004-R02-00
Phase 2 final report
Research into water allocation through effective water trading
Table 3.7: Workshop participants ............................................................................................................. 44
Table 4.1: Participants’ description of their knowledge of water trading ................................................... 45
Table 4.2: Participants’ description of their involvement in water trading ................................................. 45
Table 4.3: Reactions to the common pool approach ............................................................................... 47
Table 4.4: Reactions to the improved pair-wise trading approach ........................................................... 51

MAR4964-RT004-R02-00
Phase 2 final report
Research into water allocation through effective water trading
Foreword
Globally the climate is changing and long seeking to make specific policy recommendations. It
considered a variety of market and regulatory
term access to secure supplies of water is
arrangements that could help to inform thinking on
one of the most pressing challenges the
the methods through which water abstraction
world faces. At home our region is one of licences could be traded in the future in England
the fastest growing in the UK; water and Wales.
supplies are limited, and the east of At Anglian Water we have a strong record in
England is one of the areas most managing supply and demand. And through Love
Every Drop, our sustainability strategy, we are
vulnerable to the impacts of climate
committed to changing fundamentally the way
change.
people value and engage with water, putting it at
the heart of a whole new way of living.
Against this backdrop, and in a year of
However we recognise that we cannot address the
weather extremes, it has never been more
significant challenges facing our region’s water
important or timely to explore innovative resources on our own. And we know it is only
and collaborative solutions for the collective action and collaboration which will help us
achieve sustainable and effective water allocation.
allocation of our water resources. This year
Anglian Water has joined forces with Defra The strength of this project lies in the broad range
of stakeholders and experts it brought to the table.
to co-fund a piece of innovative research
The research project has been steered by a
on water allocation in collaboration with Working Group made up of local and national
the University of Cambridge Programme for stakeholders including: Anglian Water, Department
Sustainability Leadership (CPSL) and a for Environment, Food and Rural Affairs (Defra),
National Farmers Union, the Royal Agricultural
diverse range of project partners and
Society of England, Natural England, the
stakeholders. Environment Agency, Ofwat, WWF-UK, Association
of Drainage Authorities, Cranfield University, Atkins,
the Royal Society for the Protection of Birds and the
Broads Authority.
Particular thanks must also go to HR Wallingford,
an independent company that carries out research
into the water environment and climate change, for
leading the team; Collingwood Environmental
Planning for the stakeholder engagement part of the
project; Dr Julien Harou of University College
London and Dr John Raffensperger of the
University of Canterbury in New Zealand for looking
at tools that can assist in promoting the trading of
water and Professor Mike Young, Director of the
Environment Institute at Adelaide University in
Australia, who has provided expertise on water
entitlement and water allocation systems used
worldwide.
I hope that the work outlined in this report will inform
the development of policy on water trading and that
we continue to build on the collaborative approach
that was so invaluable in testing the potential
Using the Upper Ouse and Bedford Ouse
effectiveness of trading models.
catchment as a case study, the main aim of the
research was to test water trading as a way to
allocate water between stakeholders more
effectively. Working with leading thinkers, experts
and people on the ground we have explored the Jean Spencer
issues surrounding water allocation from each of
their perspectives and developed a shared Regulation Director, Anglian Water
understanding of trading potential at a local level Chair, Water Allocation Working Group for
within environmental limits. the University of Cambridge Programme for
Using innovative methodologies the project sought Sustainability Leadership
to generate evidence to inform policy rather than

MAR4964-RT004-R02-00
Phase 2 final report
Research into water allocation through effective water trading

Executive summary
This report presents the findings from a collaborative research project that explored the feasibility and
effectiveness of water trading systems and their implications for stakeholders concerned with sustainable
water abstraction. The project was completed as part of the University of Cambridge Programme for
Sustainability Leadership (CPSL) and the ‘Collaboratory on Sustainable Water Stewardship’.
The objectives of the research were:
 To establish the feasibility of an effective trading system at a catchment level;
 To provide stakeholders with a shared, credible, evidence base about water trading at a catchment level;
 To generate evidence to inform policy rather than make policy recommendations.
The work was carried out in two Phases:
 Phase 1 – Engagement with the key stakeholders to document and assess their understanding of how
water trading could work in the future;
 Phase 2 – The development of two demonstration water trading systems for the Upper Ouse and
Bedford Ouse catchment to show to abstractors in the catchment how different types of water markets
could work.
The drivers for this research at a policy level emanated from a number of sources including the Water White
Paper and associated documents published by the Environment Agency and Ofwat on the “Case for change”
in late December 2011. The White Paper commits the Government to reforming the abstraction
management regime by the 2020s. Current licensing arrangements are unlikely to deal efficiently with
extended periods of water scarcity, a long-term decline in availability, and greater volatility of supply. This
research commenced at the beginning of May 2012 at a time when East Anglia had experienced a two year
long drought. Although the onset of a very wet period from the beginning of April 2012 alleviated the drought,
the issues of water allocation and water use efficiency were still very much at the forefront of most
abstractors’ minds. In October 2012 Paul Hammett, the National Farmers’ Union’s (NFU) environmental
policy adviser in East Anglia, described the 2012 drought as a “near miss” for growers, but viewed it as an
opportunity to improve the situation.
Our research has been focused on the Upper Ouse and Bedford Ouse Catchment Abstraction Management
Strategy area in East Anglia.
Phase 1 of the research comprised interviews and focus groups with 27 stakeholders: abstractors holding
abstraction licences in the catchment; innovators (who have implemented innovative water management
techniques) and delivery agents such as the Environment Agency. The research focused on their views on
water management in general and on two possible trading approaches (improved pair-wise and common
pool). We report those views here without comment on their validity or economic wisdom. The main findings
of the Phase 1 stakeholder engagement were the following:
 Within the study catchment, the interrelationship between the licence types and the abstraction timing
complicates water management. As a result, each abstractor encounters a different set of challenges
and opportunities in managing their water resources. This complexity will need to be taken into account
in designing and operating trading systems;

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